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How discretionary is a UK employer’s discretion?

Employers in the UK are no different from employers elsewhere in that they often try to reserve the right (in employment contracts and bonus/benefit plans) to decide, at their discretion, whether or not to provide or withdraw certain payments and benefits. Sometimes employers will deliberately or unwittingly fetter their discretion in the drafting of the relevant provision. For instance, an employer might state that a decision to award a bonus is at its discretion but, at the same time, state that it will be payable if certain company or individual performance targets have been achieved. In addition, the UK Courts, mindful of the unequal bargaining power between an employer and an employee, have sought to place limits on the discretionary powers of employers to ensure that such powers cannot be abused. Having said that, the UK Courts have been wary of intervening in employers’ decisions unless the decision has been made arbitrarily, capriciously, perversely or irrationally or in bad faith, and UK employers have taken certain comfort from these cases. However, the recent decision of the UK Supreme Court (in the case of Braganza v. BP Shipping Limited [2015] UKSC 17) has caused many commentators to question whether the UK Courts will now adopt a more interventionist approach.

The case law before the Braganza decision

Before looking at the Braganza decision, it is worth reviewing the previous, recent decisions of the UK Courts in this area. Unsurprisingly, much of the case law has focussed on bonus decisions.

The case of Abu Dhabi National Tanker Co v Product Star Shipping (The Product Star) (No 2) [1993] 1 Lloyd’s Rep 397 established that a power conferred on one party to make decisions that affect both parties must be exercised honestly and in good faith, for the purposes for which it was conferred, and must not be exercised arbitrarily, capriciously or ‘unreasonably.’ Unreasonable, in this context, has been given a limited meaning, i.e. ‘not arbitrary, capricious, or irrational,’ and this has allowed the Courts to intervene only where an employer’s exercise of discretion has been perverse or irrational, as in the case of Clark v Nomura International plc [2000] IRLR 766. The UK High Court ruled that, in order to challenge successfully the exercise of an employer’s discretion, an employee/former employee will have to show that no reasonable employer would have exercised its discretion in the way exercised by the employer in question. In this case, the employer had fallen foul of this rule because it awarded Mr Clark a nil bonus, even though the wording in Mr Clark’s contract stated that his bonus, although discretionary, depended on his performance and Mr Clark had earned substantial profits for his employer. This decision was followed by the UK Court of Appeal in Mallone v BPB Industries plc [2002] IRLR 452, where Mr Mallone was able to show that his employer had behaved irrationally by exercising its ‘absolute discretion’ to decide that none of his share options could be exercised after termination, even though the options had been granted, at least in part, to reward past performance. In Horkulak v Cantor Fitzgerald International [2004] IRLR 942, the Court of Appeal held that the damages payment payable to a former employee (for failure by an employer to exercise its discretion rationally, in a constructive dismissal situation) should be assessed in accordance with what the court considered a “likely outcome of a fair and rational exercise of discretion.”

These decisions in favour of employees were then followed by a key decision of favour of employers. In the case of Commerzbank AG v Keen [2006] EWCA Civ 1536, the Court of Appeal held that, where (as in this case) the employer had a wide discretion regarding the form, timing and amount of a bonus, “it would require an overwhelming case to persuade the court to find that the level of a discretionary bonus payment was irrational or perverse in an area where so much must depend on the discretionary judgment of the Bank in fluctuating market and labour conditions.” An employee will have to prove that no rational employer would have exercised its discretion in that way. The Court of Appeal also held that the employer in this case was entitled to rely on a clause that stated that no bonus was payable if the employee was no longer employed by the employer on the payment date. There have been cases where the UK Courts have suggested that it may be possible to argue successfully that an employee has an implied right not to be dismissed by their employer simply to avoid express contractual obligations (such as the right to a bonus payment). However, currently there is no authority for this proposition.

The Braganza decision

We can now return to the recent Braganza decision. The facts of this case are particularly tragic. Mr Braganza was an engineer on an oil tanker, who disappeared overnight whilst on duty and who was presumed to have either fallen overboard accidentally or committed suicide. The terms of Mr Braganza’s contract were such that his widow would not be entitled to a death-in-service benefit if his employer was of the reasonable opinion that he had committed suicide. In the absence of any conclusive evidence, the employer decided, after a careful, four-month investigation and on basis of various points set out in its investigation report, that suicide was the most likely explanation.

The Supreme Court accepted that the opinion that mattered here was that of the employer (as the contractual decision-maker), rather than the Court, which could not substitute its own view for that of the employer. However, crucially, the Court decided unanimously that a Court can review the employer’s decision to decide whether the decision-making process is rational, whether the decision is made rationally (as well as in good faith) and whether it is consistent with its contractual purpose. The Court also decided that when considering the issue of rationality, the Court should have regard to the public law concept of ‘Wednesbury unreasonableness’, in other words whether the employer has taken the correct matters into account and whether, having done so, the employer’s decision was so unreasonable that no reasonable person acting reasonably could have made it. A majority (3:2) of the Supreme Court was then able to decide that, although the employer’s decision had not been arbitrary, capricious or perverse, it was unreasonable on the basis that, given how improbable suicide is as a reason for death, there had been insufficient cogent evidence to overcome this inherent improbability.

Does the Braganza decision herald a new interventionist approach by the UK Courts?

There is an old legal expression that ‘hard cases make bad law’, meaning that an extreme case (often arousing sympathy) is a poor basis for a general law that would cover a wider range of less extreme cases. So, does the Braganza decision fall into this category, setting a dangerous precedent for a more interventionist approach by the UK Courts? That perhaps remains to be seen.

It is arguable that just as important (perhaps more important) than the decision in the Braganza case is the UK Courts continued willingness to develop the law on the implied mutual duty of trust and confidence which exists between every employer and employee.

In making reference to the public law concept of reasonableness, the Supreme Court has decided that a Court is entitled to consider not just the reasonableness of the decision but also the manner of the decision-making process. This has opened the possibility of employers’ decisions being subject to greater scrutiny than in commercial contract situations, justified by the nature of the employment relationship, where the employer has an inherent conflict of interest when making such decisions and the employee has less bargaining power than the employer. However, the degree of scrutiny of the Courts will depend on the nature of the decision and the Courts will be less likely to intervene in cases that involve a qualitative judgment of the employee’s performance in, say, cases relating to discretionary bonuses.

It is arguable that just as important (perhaps more important) than the decision in the Braganza case is the UK Courts continued willingness to develop the law on the implied mutual duty of trust and confidence which exists between every employer and employee. The judges in the Supreme Court in the Braganza case could not agree on the relevance of this implied duty of trust and confidence to that case, although it was suggested in that case that the Courts may be more willing to subject decisions made by employers to greater scrutiny (than other decision-makers) not just because of the inequality of bargaining power between employers and employees but also because of the duty of mutual trust and confidence. It is already well established that an employee may be able to challenge the exercise of an employer’s discretionary powers by arguing that the employer’s decision was so unreasonable as to constitute a breach of this implied duty and therefore to constitute a fundamental breach of contract. This is important because any breach of the implied duty of trust and confidence by an employer will give an employee the right to resign and claim constructive dismissal. The Braganza case makes further developments in this area of the law even more likely.

What practical lessons can be learned?

The Braganza decision reminds us that discretionary powers in UK employment contracts need to be drafted carefully and that employers need to think carefully when exercising these powers. Arguably, it is now even more important for employers to think about (and document) the decision-making process. As part of this process, employers should ensure not just that they avoid reaching an unreasonable outcome but also that the right matters have been considered in reaching the decision and in some circumstances, sufficiently cogent evidence may be needed to back this up. Employers should also consider applying more stringent processes when drawing conclusions that may be considered ‘more unlikely’ or unusual than others. For example, if an employer exercises its discretion to award a nil bonus to an employee who has been on sabbatical for most of the year or if an employer exercises its discretion to pay a discretionary bonus that may appear to be disproportionately low in light of the profits made by the employee. Employers should also take care to give employees the reasons for their decisions.

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